UK construction: fastest rise in output for nearly five years

The seasonally adjusted activity index produced by information provider IHS Markit and the Chartered Institute of Procurement & Supply found that an increase in house building as well as new construction orders accounted for the increase in activity.

The UK construction index rose from 55.3 in June 2020 to 58.1 in July, contrasting with figures for the Eurozone construction sector for the same month. Europe saw a slowdown in the decline in construction activity, but the index reading of 48.9 was still below the ‘no-change’ threshold.

However, the speed of recovery in the UK construction industry was insufficient to prevent additional cuts to employment numbers, and the rate of job shedding was faster than in June, according to the data (3 page / 156KB PDF).

IHS Markit said residential building had increased to the greatest extent since September 2014, driven by “the release of pent up demand and reduced anxiety among clients”.

The amount of commercial work and civil engineering activity also rose faster than they had done in June 2020, largely due to catching up work delayed by the Covid-19 pandemic.

Although new orders rose at the fastest rate since February this year, some construction companies said clients were still apprehensive about new projects. That meant significant competition for sales as well as squeezed margins.

Construction law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law, said the fact that other important sectors such as manufacturing and services had also seen a rise in activity was a positive sign.

“Amidst the continuing murk as to the likely shape of the post-lockdown UK economy, the latest construction purchasing management index figures provide some welcome sunlight. The strong readings – strongest for July across the different sectors of the UK economy, which is something of a first – go some way to corroborating the Bank of England’s latest optimism that the ‘V’ recovery may not be as deep as first feared. This data also bucks the historic trend that construction is often the last part of the economy into a recession and the last to come out,” Hart said.

“But, it is important to remember that there is no single construction industry. Different parts of the industry will be responding in different ways. The house-building sector would appear to be particularly benefitting from the end to lockdown; something that may be enhanced over the medium to long term by the government’s proposed changes to the statutory planning regime,” Hart said.

“By contrast, for the civil engineering and capital maintenance sectors, the way ahead may be less clear, since this an area where direct government involvement and procurement processes are going to have the biggest effect – something corroborated by other data being identified by civil engineering association CECA, for example,” Hart said.

Construction firms were optimistic about the prospect of a recovery in business activity over the next 12 months, with 43% of survey respondents expecting a rise in output. Meanwhile 30% forecast a fall in output in the next year.

Nevertheless concerns over the speed of recovery meant that firms were continuing to make staff redundant. Around a third (34%) of survey respondents reported a fall in staffing in July.

“Underpinning all aspects of the industry are the continuing effects of the range of measures introduced by HM Treasury during the course of lockdown: the furlough scheme, which many major contractors are now starting to roll up; government encouragement of contractual forbearance, through procurement guidance; and the temporary measures under the Corporate Governance and Insolvency Act. These are all coming to an end shortly,” Hart said.

“July’s figures may be reflecting rising summer temperatures – and are equally welcome, but there may be time to reflect further with the arrival of cooler climes and further Treasury announcements in the autumn,” Hart said.